African Re: Battling Discrimination, Local Content

Operators of African reinsurance are being discriminated by their foreign counterparts due to ‘A’ Ratings which Africa is lagging in for over 200 years. Since 2010, there have been suggestions that imposition by foreign companies over local reinsurers still persist. Odimegwu Onwumere writes

Seriously weighed down by the global economic downturn, insurance operators in Africa are currently battling for a full scale local content policy in a bid to maximise profit. They are also belligerent that multinationals doing business on the continent prefer to insure with their home countries. As a result, reinsurance companies in Africa are being hindered by prejudices in their deals with corporations in North America and Western Europe.

International players come to the African market and haul successful deals. However, there are problems of delays in reinsurance premium remittances, making foreign operators to consider the risk and costs involved in doing business with the local. Few reinsurance companies in Africa are rated satisfactorily by international rating agencies in line with security ratings.

While there may be solvency regime in the foreign sector, Africa is still lagging in financial unassailability of insurance and reinsurance operations, therefore operators on the continent have not fared well during difficult times, cumulating to un-protectiveness of policyholders and instability of the financial system.

Patience Saghana, a leading voice in the industry, once said: “The low and negative economic growth which impact negatively on investment returns, profitability and capital growth, and in return on underwriting capacity of insurance companies in Nigeria and other African countries, have made local underwriting firms in Africa to suffer problem of discrimination in their dealings with companies in the developed countries of North America and Western Europe.”

The black continent has invariably repudiated to take a clue from – Latvia, Lithuania, Moldova, Romania and Slovenia – that made a resolution in 2010 that overseas assignments might be sought but only when their domestic reinsurers were unable to underwrite risks. Prisca Soares, a Secretary-General of African Insurance Organisation (AIO), said the 16th Reinsurance forum in Casablanca, Morocco from October 3rd to 5th, 2010, would decisively address issues concerning solvency, governance, and pension funds in relation to reinsurance companies with 55 member countries of the body, but African countries have not stood firmly to the occasion after then.

Less Influence
It has been envisioned that reinsurance is at cradle in Africa for over 200 years that ‘A’ rated companies have been existing. This portends that the industry is still gasping for consolidated institutions, good balance sheet and the ability to demonstrate to the insured that it can pay when there is an emergency.

Recently, African insurers and reinsurers accepted their failures and agreed that the time has come for them to ginger Africa’s growth in the area of exhuming all methodologies that have been untapped in engineering insurance and reinsurance skills, by encouraging one another in the areas of knowledge impartation in ensuring that the sector on the continent stops biting the dust.

Since the 2014 natural catastrophe, reinsurance rates have continued to demur, upon that the sector was since 2008 disciplined in its underwriting. The irony is that when in 2010 the sector was waiting for the heralded hard market, it did not come but much later. For two years, reinsurers have been under threat from losses and pressure on virtual all lines of business. 2014 recorded an added year of almost low levels of natural catastrophe losses. Today, key companies are wailing that they do not see business flow to them into higher retention.

Moody’s Investor Services, a rating agency where Kevin Lee, is an analyst, said, “Falling reinsurance prices have encouraged insurers to cut commercial property insurance rates but have had less influence on casualty insurance prices where low interest rates have encouraged underwriting discipline.”

In December 2009, the same thing happened when expectations were high that the reinsurance market would blossom for the 2010 renewals. It was a catastrophe season, even with the improved finances, and an enhanced investment environment.

There has been less demand by primary insurers making reinsurance prices to be flat. The international insurance markets, where the reinsurance industry of Africa gets its retrocession, are not having it easy in recent times. The lack of strong regulators in Africa has really played down on the continent.

Political Influence
Reinsurance regulators in most African countries have been regularly clinging to the decision of their political dictators. The regulators throw to the wind the notion that regulation is optimum in enhancing how financially capable companies are.

In addition, experts said that this “can act as a catalyst for attracting inflows of capital and business. The intensity of industry regulation often has a direct relationship with the perceived risk of insolvency of insurance companies in a particular market.”

Governments and regulatory bodies are not helping matters. For instance, in Zambia, a dam was financed by China, which later gained over 70 percent of the insurance. This is the reason in many quarters, insurers and reinsurers are haranguing that they need to be involved in deals that affect their individual countries to protect their wellbeing.

There was a prediction that a major disaster would turn the reinsurance market in the near future. It is not farfetched seven years after, counting from 2009. In that year, capacity was more than adequate, yet reinsurers gasped for lungful of air to refill capital, just as it is the case today.

The multinationals own the big risks and the reinsurance is not faring well in Africa due to the economic crunch that has devalued her economies that depended on commodities like copper, gold, or crude oil to outclass.

In oil and gas, engineering, fire, property and so on, Africa has not performed over 50 per cent in risk underwriting. Regulators are not helping matter in making sure that local aptitudes are consumed before anything is given to foreign firms.

Mr. Adeyemo Adejumo, the then managing director of Continental Reinsurance Plc in April, 2010 said that CRe was making impact in the reinsurance business in Africa with up to 60 per cent foreign ownership and 40 per cent local; but if that was anything to go by, how come operators are crying today than ever.

Some African reinsurance companies may be doing well, but this does not represent the stance of the collect reinsurers on the continent, who in 2010 remained in business due to good governance and after the attack on World Trade Center in September 2011.

It is vital to understand that many of the African reinsurers would have closed shops if not for the fact that they have big offices in the Americas and Europe. In a bid to escalate business, the reinsurers moved to other parts of the African continent beginning in January 2005, with business offices opened in Douala, Cameroon.

Currency Fluctuation
Many companies on the continent are relocating to safe havens for business due to vacillation in currency.

The currency oscillation poses a great risk to reinsurance in Africa with big projects offered to reinsurers from outside the continent of Africa.

The fear this has elicited is that operators make sure that they know where and when to invest in before they venture into any business.

Lame-Duck Approach
Since 2010, there have been suggestions that imposition by foreign companies over local reinsurers still persist. There is a law in a country like Nigeria, which encourages the exhausting of local capacity. It’s therefore, quite discomforting why local insurers are still suffering in the market place.

Perhaps, there is more need for modern technology in the sector. The under development of the industry in the areas of communication, and support to agriculture, amid others, have continued to create chasm and problems for local players.

Those covering risks in the field of construction, aviation and marine, oil discovery amongst others, are mostly affected by the shabby implementation on the way forward for the industry.

Challenges
The biggest challenges appear to be in West Africa. This sub-region recorded a huge loss in property and fire last year, with Cameroon and Ghana, being the worse hit.

It is depressing that the sector is being threatened by international players that are looking for ‘A’ rated companies before they could do business with local companies, knowing that the sector in Africa is zero in that aspect.

Without the ‘A’ rating, it’s tough for a local reinsurer to receive shares from the international market.

”It is even more difficult to obtain balance-of-payments statistics for reinsurance flows, because many claims and liabilities between direct insurer and reinsurer are netted out, and only the balances are transferred internationally”, said Saghana. On May 3, 2010, the source added that Moroccan market practices facultative reinsurance.

“Facultative reinsurance has an advantage in that it has the flexibility required for tailor-made covers, but for smaller companies it has the disadvantage of virtually allowing the reinsurer to impose his terms and conditions on the direct writing company, not only as regards the terms of markets and neighbouring countries and by way of intermediaries, they have been able to build up international portfolios,” she said.

Decline In Rates
Africa is not exempted in the global competitive market conditions that have led to plenty of global ability and a lack of huge insured loss bustle that accounted in enhanced underwriting outcomes and yielded heartening mutual ratios and helped account for the ninth uninterrupted quarter of rate shrinks.

The sector has recorded loss in the global pricing property calamity. Participants in the reinsurance are in quest of returns in the businesses entered than invest in fresh deals. There is heightened competition.

A principal voice in the industry, Marsh Global Industry Specialties and Placement, analyzed last year, saying that excess levels naturally stayed at or near record levels, helping to drive the competitive marketplace, during the second quarter.

Another capital persisted to flood into the sector and was generating an added source of risk conveyance, encouraging rivalry, and helping to drive rates lower.

Dean Klisura, the Leader of Marsh Global Industry Specialties and Placement, added, “While there are some insurers exiting certain lines of business, overall market capacity remained abundant during the quarter.

“Market capacity aiding the market’s overall capacity has been the willingness of companies to consider capacity outside their regional geographies. This strengthens the global nature of the marketplace.”

Despite Efforts
Despite efforts that reinsurers are putting to stay in business, with centre view on disciplined underwriting, it has remained overcapitalised.

In September 2011 when there was rising cost of reinsurance, there was upwards pressure put on primary fatality rates, with emphasis on property.

In 2015, a report by a leading voice in the industry, A.M. Best, suggested, “Most companies continue to indicate that intense competition is leading to lower underwriting margins for certain lines of business, the need for disciplined underwriting now more than ever should remain the focus.

“With rates continuing to decline for some lines of business, terms and conditions becoming even broader, and ceding commissions increasing further.”

The report further added, “The expectation remains that reinsurance pricing overall will remain under pressure in 2015 given continued pressures from alternative capital and the lack of any price changing event over the past few years.”

Way Out
Players on the continent are troubled with sourcing capacity particularly for greater and multifaceted risks, and most times without reinsurance protection.

Suggestions are that operators have to consider that the world has gotten to a stage where non-life reinsurance premiums have increased faster than others and should embrace reinsurance coverage of risks underwritten by stakeholders as being played all over the world.

The continent has to rethink if she is rendering cheap service in the global market. A highlight of this was the position by Mr. Ken Aghoghobvia, a Regional Director, West Africa Office of African Reinsurance Corporation, “Africa has a lot it is offering on the world market very cheaply without recognition, which weakens Africa’s negotiating stance.

“If you do not know what you have and what it means to the world, you fail to realise the need to include such items in the negotiations, and go out all the times begging instead of the other way round.

“Africa needs to enhance its own markets for its products through regional economic integration, and reduce the dependence on exporting primary products. So Africa needs to break into world markets through hard knowledgeable negotiations, improved quality and prices of what it offers.”